Friday, March 10, 2017

Should trade policy be about "the art of the deal" or about facilitating economic growth?

"We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength" - Donald Trump, Inaugural Address, Jan. 20, 2017
How should the Australian government respond to the potential
for the crazy trade policies of President Trump to take the world into a new era of trade
protectionism? Since Trump’s inauguration the depth of his commitment to trade
protectionism has become clearer. In my view we should be prepared for the unravelling of much of the international trade liberalisation encouraged by the U.S. in the latter half of the 20th
Century.

If the Australian government continues with the current
directions of international trade policy – viewing trade policy from an
economic diplomacy perspective – there is a real risk that it will take
ill-considered retaliatory action to foreign protectionism. Politicians who put
their faith in trade diplomacy – the art of the export deal – think that they
are pursuing the national interest when they make access to the Australian
market contingent upon foreigners allowing our exporters to gain access to their
markets. In terms of that mindset, if foreigners restrict access to their
markets, it would appear logical for us to retaliate.

By contrast, political leaders who view trade policy as part
of economic growth policy are more likely to keep in mind that the substantial
trade liberalisation effort that Australia has made over the last 40 years has
occurred unilaterally, rather than as part of any international deal. A growth
policy perspective recognises the contribution that unilateral trade
liberalisation has made to our prosperity.

The substantial trade liberalisation efforts made in
Australia since the beginning of The Tariff Review, established in 1971, have all
occurred for domestic reasons. Except for the 25 percent tariff cut of 1973,
which was motivated primarily by macro-economic objectives, all of the
reductions in industry assistance have occurred primarily to promote the
micro-economic reform objective of providing incentives for greater
productivity throughout the economy. That applies to reductions in non-tariff
barriers, including reform of agricultural marketing arrangements, as well as
reductions in reductions in tariff barriers.

As with other microeconomic reform policies, trade
liberalisation efforts in Australia have not been pursued with equal enthusiasm
by all governments. However, a sustained push toward trade liberalisation was
initiated by Bob Hawke (then prime minister) and Paul Keating (treasurer) in May
1988 as part of a major package of microeconomic reform measures. In delivering
the statement, Keating commented:

“The way forward for Australia is not to be closeted and
sheltered, but to be open and dynamic, trading aggressively in the world. Only
this kind of economy can provide the employment and rising living standards
that Australians aspire to”.

In the light of the toxic political environment currently
prevailing in Canberra it is worth remembering that those reforms were
facilitated by support from the Liberal–National Party Opposition.

The trade liberalisation that was being undertaken in pursuit
of microeconomic objectives was subsequently ­offered, and accepted, in Uruguay
negotiations as our market-opening contribution to global trade reform. As the
Tasman Transparency Group has noted, this approach enabled us to secure all the
gains available from trade negotiations — the major gains in efficiency from
reducing the barriers protecting our less competitive industries, as well as
those available from access to external markets. That exercise should have
provided the model for all subsequent international trade negotiations.

Unfortunately, the opportunity for further gains from the
pursuit of microeconomic reforms has been missed in subsequent trade
negotiations. Australia’s agenda in recent negotiations establishing a range of
preferential trading agreements (PTAs) was simply a market access wish list. Following
the conclusion of PTAs, governments have measured their success solely on the
basis of whether the outcomes improved access to external markets.

The academic research that the Department of Foreign Affairs
and Trade is now sponsoring on “the effectiveness of economic diplomacy in
contributing to Australia’s exports and inflow of foreign investment” does not
seem to be directed at answering a comprehensible, policy-relevant question. Research
being undertaken by the Productivity Commission on implications for Australia’s
trade policy of possible international shifts towards a more protectionist stance
seems more likely to provide a basis for sensible policy development.

Previous research on the consequences of PTAs suggests that there
are no grounds for complacency that the economic benefits even exceed costs.
For example, using an analytical framework developed by the Productivity
Commission to assess our much-heralded trade agreement with the United States, Australian
National University economist Shiro Armstrong found that the agreement was responsible for
reducing — or ­diverting — $53.1 billion of trade with the rest of the world. Hehas suggested that “the data shows that … Australia and the United States … are worse off than they would have been without the agreement”.

Recent Australian governments have at times acknowledged
that trade policy should be part of a wider productivity promoting agenda. Nevertheless,
the government seems to have been at a loss to know how to counter the argument
that Australian governments should be seeking to provide a level playing field
for domestic industries vis a vis subsidized foreign competitors. This argument
has figured prominently in lobbying in some quarters for further government
assistance by way of anti-dumping action and government procurement preferences.
The government has been slow to point out that if we are to use a playing field
analogy – and our interest is in promoting the wellbeing of Australians rather
than conducting trade wars – the relevant basis for comparison is the relative
assistance levels of different Australian industries. As a rule, if industries
need assistance to compete internationally, they can’t be making efficient use
of resources.

If the Australian government is serious about
its commitment to lift national productivity it should place trade policy in
the Treasury department – the department with central responsibility for facilitating economic growth. This would add some much-needed economic discipline to the
conduct of trade policy as we face a more difficult world trading environment. The
last thing we need in this environment is a bureaucratic structure for trade
policy that is biased toward mindless deal-making and retaliation

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